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Different Types of Annuities & Their Timelines

Retirement Planning
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Mature couple at laptop learning about different types of annuities

Different types of annuities offer different benefits, and the terminology surrounding these long-term investments may be confusing at first. Financial professionals can help you make sense of everything, but here's a basic overview of the available annuity options and their timelines to help you get started.

What Are the Different Types of Annuities?

You can choose from several different types:

Fixed Annuities

Perhaps the easiest to understand, fixed annuities help you grow your money because they provide a guaranteed rate of return. They typically have a minimum guaranteed interest rate, and your earnings are typically not taxed every year (although you will need to pay taxes when gains in account value are taken out of the annuity). If you want to withdraw funds or transfer funds to another account, you can typically do so periodically, but this may be subject to surrender charges and an early withdrawal tax penalty if you're under the age of 59 1/2.

Immediate Annuities

Immediate annuities can provide a regular stream of payments. To begin payments from an income annuity, you pay a nonrefundable lump sum of money to an insurance company and then receive payments based on the terms of the contract or specific product. Those payments could last for the rest of your life (and your spouse's life, if the insurance company offers a product with this option), or you can receive payments for a certain number of years. Keep in mind that payments received are typically fixed, which can cause inflation risk.

Variable Annuities

If you'd like to grow your funds — and you're comfortable with the ups and downs of markets — variable annuities allow you to allocate your money among a variety of investment options called sub-accounts. Like a fixed annuity, any earnings in the annuity are tax-deferred, and you could eventually convert the annuity into a stream of guaranteed payments for life. With variable annuities, it is possible to lose money, so it's critical to evaluate your risk tolerance and study your variable annuity's prospectus before investing.

Indexed Annuities

Some annuities allow you to participate in positive changes in an index to a limited degree. You cannot lose value due to declines in the index, but you may still have fees or other expenses. Indexed annuities have interest rates that are based in part on positive changes in indexes. Plus, they may also pay a minimum guaranteed interest rate, regardless of what happens in the index.

Significant Annuity Milestones

So, what can you expect when you purchase an annuity? Some of the timelines below can help you understand how your annuity works.

Important Dates to Know

The following dates may be important when you purchase an annuity, depending on the type of annuity:

  • Issue date: All annuities have an issue date, which is when the insurance company issues your contract by processing your application and premium payment. Insurers typically begin paying any guaranteed interest rate on your account starting on the issue date.
  • Sweep date: Only indexed annuities have a sweep date, which marks the day when you first start to participate in the index allocation's performance. The sweep date varies by insurer, but typically insurers will allocate the funds between one and 22 days after the initial investment.
  • Crediting period: With indexed annuities, the crediting period begins on the sweep date and typically lasts from one to three years, depending on what you choose. At the end of the crediting period, the insurer calculates how much interest you'll receive from an index you have selected, and you receive any earnings you qualify for at the end of the crediting period.

Timelines for Withdrawals

When it's time to spend your money, you'll want to be mindful of the following:

  • Surrender period: Annuities are typically long-term investments. As such, insurance companies set early withdrawal charges to help them manage risk and discourage you from cashing out shortly after investing. You can typically take 10 percent of your account value with no withdrawal charge annually, but withdrawals above that amount may cause additional charges. Over time, the withdrawal charges decrease and fall off, allowing you to cash out or transfer the entire account.
  • First payment: If you purchase an immediate annuity (or if you convert an annuity into an income stream), you typically receive your first payment as early as one month after the issue date. However, verify the details with your insurance company. You may also be able to select a date in the future or opt for less-frequent payments (quarterly, for example).

Making the Most of Your Annuity

With an understanding of how annuities work, you'll be better equipped to choose the right annuity for your needs — and you'll have a better understanding of what you can likely expect along the way. If you have more questions, consider speaking with a financial representative.

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